Gap Fill Strategy At Its Finest

Skechers USA, ($SKX) reported earnings last Thursday after the close of the market.  The stock had lost almost 50% of its value year to date and was trending lower.  The stock reported a better than expected outlook for the fourth quarter and earnings topped analysts’ consensus estimates.  However, its sales growth slowed and missed expectations.

The stock surged almost 14% and traded up to $31.97, rallying right into a GAP area from previous earnings back in July.  As you can see from this chart, the stock “filled the gap,” meaning it traded up and through all of the blank space you see back in July where there was no trade at all.  Gap fills can be a very powerful indicator and we indeed picked up on this and bought a put spread Friday when the stock was trading above $31.

We were able to buy the November 16th Expiration 30/27 put spread for $0.75, offering a fantastic 3:1 reward to risk.  SKX sold off over $2 from its high point on Friday and closed at $29.72.  Today, the stock traded down another $1.47 and closed at $28.25.  How did we manage our position?  We sold half the position for $1.35 (an 80% return in less than one trading day) and we have an exit order (yet to be filled) for the remainder of our position up at $1.65.